If annuity makes sense, then which one?

Q1. My wife and I are retired, we are losing money in our mutual funds, and we are considering buying an annuity so that our money is more secure. I am 67 years old and she is 62. She is a housewife, and I want to be sure that she will have money to live on after I'm gone. I would like to know if it is best to buy the annuity? If so, which one would be a good one?

Q2. I am looking at an immediate annuity through AARP. A $100,000 investment will pay me and/or my wife $7,000 per year for life. Is there a better solution to increase my cash flow in retirement without running out of money?

A. I'm a big fan of buying financial safety through diversification. In other words, hold a portfolio of stocks, bonds, cash, commercial real estate, commodities and international securities. The basic idea is that when one asset (or more) zigs lower, another asset (or more) may zag upward.

Now for many retirees, adding an immediate annuity to the diversification mix often makes sense. Retirees get a predictable income on the investment for the rest of their lives.

There are a number of factors to consider.

You should only do business with a highly rated insurance company, or buy an immediate annuity sold through a well-known mutual-fund company.

You want to work with a company with a blue-chip balance sheet. You'll need to shop around, since your stream of income depends on how much you invest, your age, the interest rate and other factors. For instance, both questioners will probably want a payout guaranteed to last as long as either spouse lives. But that means a smaller payout than one based on one life.

Inflation is another critical factor. Think about it: $100 loses half its value in 20 years with a 3.5 percent average annual rate of inflation. You'll take a lower payout in exchange for inflation protection, but it can be worth it.

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Chris Farrell is economics editor for American Public Media's weekly "Marketplace Money" show on public radio. He lives in St. Paul. Send questions to cfarrell@mpr.org and put "Your Money" in the subject line.